By Ryan Ellis
“We should help Americans purchase their own coverage, through the use of tax credits and expanded Health Savings Accounts –- but it must be the plan they want, not the plan forced on them by the Government.” President Donald Trump Address to Joint Session of Congress February 28, 2017
This month is shaping up to be the one when Congress and the president have finally repealed and replaced Obamacare, taxes and all. But there is a long way from here to there.
One of the roadblocks to date has been House conservative skepticism about an advanceable, refundable tax credit for individuals to purchase health insurance. Some have labeled this tax credit a “new Republican entitlement.”
Is that a fair critique? In a word, no. Here is why:
Tax credits to purchase health insurance are not a new idea. To say that a tax credit to purchase health insurance is new or different for Republicans is like saying peanuts are a new ingredient in Cracker Jacks. It’s been around forever. George W. Bush ran on them in 2000. So did John McCain in 2008. Mitt Romney was open to the idea in 2012. In more recent years, they’ve been featured in the Burr-Hatch-Coburn-Upton plan, the Ryan-Upton-Kline plan, the Tom Price plan, and the Rand Paul plan. There are so many Republican health tax credit plans out there, I am sure that I am missing some.
Tax deductions for health insurance–the alternative to tax credits–don’t help lower-income people. Some Republican plans (like the Republican Study Committee plan, and the Bush 2007 plan) instead propose a tax deduction for the purchase of health insurance. The principal problem with this is that many people who require assistance to afford health insurance don’t have an income tax liability, or much of one. The deduction is worthless to them. The secondary problem with a deduction is that it is more valuable the higher up the income ladder you go–exactly the opposite of how assistance should be targeted. All in all, a deduction is simply not a viable option here.
The tax credit in the House GOP plan only applies to a narrow section of the population. It’s difficult to square fears of a “new entitlement program” with the relative modesty of who gets covered here. In order to qualify for the tax credit, you (or your spouse or parent) cannot be eligible for a workplace plan, Medicare or Medicaid. According to the Kaiser Family Foundation, that’s about 7% of the U.S. population. This tax credit only applies to people who are buying individual market health insurance and have no tax benefit or assistance from employers or the government. It’s actually quite a modest set of people.
People cycle in and out of this small sliver all the time. Near-retirees are in this sliver in the years between leaving a job and enrolling in Medicare. People between jobs are in this sliver. The self-employed are in this sliver. It’s not as if there is some tax-credit dependent fixed population being created under this plan.
Obamacare also had a tax credit, but that was a bastardization of a good idea. As noted above, Republicans have supported a healthcare tax credit for a long time before Obamacare came along. Obamacare’s tax credit works very poorly, is not effective, and has generally been a mess. It would be a mistake for Republicans to rule out good ideas gone wrong by past policy errors. A tax credit was and is a good idea here.
The tax credit is far more easy to administer than the Obamacare tax credit. Obamacare’s tax credit was means tested, meaning that the IRS and SSA had to attempt in real time to guess what one’s income will be by the end of the year. Guessing wrong meant an ugly day of reckoning on your tax return. The credit also was supposed to integrate with the employer and individual mandates, which obviously aren’t present in the House GOP replace plan.
Instead, the tax credit proposed here will vary in size on only two factors–household size and age. Both of those are pretty well known before, during, and after the year is over. The former–family size–could change during the year, but only to the upside for a taxpayer. With far fewer variables and a transition period to get there, this tax credit should work pretty smoothly.
The fact that the tax credit does not phase out based on income, as the Obamacare credit did, also means healthier/wealthier people in the narrow slice of the population using these credits will be more likely to be paying customers of the risk pool. That should reduce the cost of insurance for everyone.
The fact that the credit is advanceable does not make it an entitlement. The House GOP tax credit is, among other things, “advanceable.” What does this mean? An example might help illustrate.
Suppose you are one of the 7% of American families who are eligible to use this credit. Based on your age and family size, you have a credit eligibility of $9,000.
You decide to purchase a health insurance plan which has an annual premium (that is, what you pay to be covered by the plan) of $12,000 (that is, $1,000 per month). Without the tax credit, you would find yourself paying out of pocket $1,000 per month to the insurance company, as many families do today.
But because you are eligible for the credit, and because the size of your credit is knowable at the time you decide on a health plan, you get some help in paying that $1000 per month. Every month, the insurance company reduces your premium bill by 1/12 of your credit amount ($9,000 divided by 12 is $750). So your out-of-pocket premium cost declines from $1,000 to $250 to $750 less.
At tax time, you report that you have already received your tax credit in the form of the insurance company’s reduction of your premium bill. Done and done.
What we’re talking about here is a cash advance–you get your tax credit in real time in order to help pay premiums in real time–as opposed to waiting until the next spring’s tax filing season to get a lump sum. That’s not an entitlement–it’s a simple matter of common sense cash flow. A timing detail like that is not the reason why a tax credit is or is not an entitlement. It’s just a way to make sure working class people can make use of their tax credit in real time, month to month, as they pay for their health insurance.
The tax credit can be applied toward your HSA. There’s another big upside of this credit. Suppose that you decide you want to apply your $9,000 family tax credit toward an $8,000 annual premium policy–that is, your credit is bigger than your premium cost. In that case, the extra $1,000 is deposited right into your HSA. Best of all, this $1,000 HSA contribution does not count against your maximum tax-deductible HSA contribution limit (which itself is doubling under the House GOP plan).
A refundable and advanceable tax credit to purchase health insurance has been a conservative staple for years. Now is the time for conservatives to unite behind the House GOP plan and finally repeal Obamacare once and for all.
Learn more here.